Outlook for Private Equity and M&A for the Remainder of 2023

Hi, Ariel. Thank you so much for being with me today.

Ariel Fischman:
Thank you for having me, Elana.

EMS:
So, Ariel, to kick off the conversation, tell us a little about 414 capital and how you got to where you are today.

AF:
Sure. 414 Capital is a global financial advisory and investment banking platform. We began operations in New York right after the 2009 crisis, and we've grown almost every year, especially in Latin America.

Our core activities are M&A advisory across all industries, alternative placement agent, we do corporate finance consulting, and we do portfolio valuation for funds. Our position is predominantly in cross-border deals, whether inbound or outbound. So, over time, we've become the house that helps multinationals enter or exit the Latin America and Caribbean region. That's the summary of what we do.

EMS:
Ariel, we're definitely in an interesting time right now for the private equity industry and M&A activity. Love to hear your thoughts given the current macroeconomic and deal environment.

AF:
It's a challenging fundraising environment, and without funds that there can't be deals. So, managers are a bit more cautious, and the times of those expressed pitches with exorbitant valuations are really thing of the past, at least from what I see. In the area where we practice most, which is Latin America, PE hasn't historically been the largest driver of activity. It's been strategics in the driver's seat. And this may not apply to some of the real asset classes, like infrastructure and real estate, but in traditional P, the driver will be corporate liquidity. And with the potential recession that's expected, or who knows, maybe not so much anymore, corporates are using their balance sheets really cautiously. So, if you put all that together and what do you have? The deals that make sense will continue to happen at the adequate valuations, of course. But we won't be seeing people doing those deals just for the sake of doing them. It's sort of a burst that happens every cycle.

EMS:
And Ariel, what about, from your client perspective and their transactions, how has everything on their end been impacted amid the current deal environment?

AF:
Buyers are cautious. There's no universal rule to indicate the typical duration that a deal should have because all the assets and sellers are buyers are different. But in the past couple of years, deals have taken a bit longer to close than what my experience dictates, and that's a 20-plus year experience. I've seen deals.

I attribute this, at least partially, to remote work. It's simply easier to juggle many balls at a time when you're sitting in front of a monitor than when you're in a conference room full of actual, physical people in front of you. And the cost of that is that you focus less on that given situation.

EMS:
And Ariel, as a follow-up, how has the current deal environment changed the extent and types of due diligence being performed by buyers?

AF:
That's a great question. In my view, due diligence will always be due diligence, and the extent should not change based on the times, but on the potential risks of your target. And of course, in times of excess liquidity and funding bonanza, there's an incentive to close more deals and quicker, and that led to diminished care. But we, as advisors, have never changed our view on the need for adequate due diligence. Maybe quite the contrary. In recent years, tax authorities have been on active collection campaigns in some geographies that we work in very aggressively. And that calls for, as an example, more detailed tax diligence.

The other positive trend we see in due diligence is more focused on ESG and DEI matters. DEI is a big thing we're seeing more and more.

And one more point maybe to mention, regarding due diligence, we see more cases in which sellers engage reps and warranties insurance just as a way to prioritize liquidity.

EMS:
Ariel, what is one piece of advice you would give to a seller looking to go to market in the short term?

AF:
You need to get it right the first time. There's this saying, "You come at the king, you best not miss." So, you need to sell the right story with the right company at the right time, and you have to do it adequately prepared. And if you don't do it well, you're not going to get it right.

On the sales side, I always tell clients or potential clients to be really smart in timing the market and timing the company to make sure that if they do run a process, they succeed. What you don't want to do is run a process just to see what happens, risk failing. Because if you do that, the next time that you try to run a sell-type process, you're going to have to answer too many questions.

I guess one second piece of advice that I find myself giving more and more often is engaging a vendor's due diligence during the preparation stages. It's not something we saw often in the past, but we see it more and more. If there's something to be found about your company, you want to be the one who finds it and you want to have a chance to remediate it. So, to the extent that the size of the transaction and the complexity of the transaction merits, a vendor's due diligence, really, it's a cheap insurance.

EMS:
Ariel, let's shift gears and talk about some of the industries that present both the greatest opportunities and challenges when it relates to M&A activity.

AF:
So, challenging industries, I think that's easy. Anything that burns too much cash or that relies on overly optimistic projections, I think the music stopped in those industries and so we see challenge in selling companies that have those characteristics.

Industries with the most opportunities were especially active and bullish in two thesis or two families of thesis. One is industries that rely on demographic trends, like food, especially agro, agriculture, we do a lot of that, education and healthcare, aging population. And the second thesis is industries that support the global shift in e-commerce or commerce like nearshoring and logistics or labor-intensive manufacturing, anything that rides the nearshoring wave.

EMS:
Ariel, as you mentioned earlier, ESG continues to be top of mind when evaluating companies, and love to hear your thoughts with respect to how this relates to deal making activity.

AF:
Sure. So, first of all, ESG means different things to different people and we see that and in different countries, the extent to which companies care and analyze ESG and DEI is different. It's there, it's a thing, and it's happening. And as I've mentioned before, we see it more and more.

I do want to say, in all honesty, we have identified several cases in which companies are just doing it to greenwash or to check a box. If you ask me, in my personal view, it's unfortunate. It's still better than nothing but not sufficient. But the trend is there.

And if you go through fundraising chain, especially going back to the PE point, institutional real money accounts or LPs ask the question and they care and they keep track of very careful statistics on ESG. And so it's become less of a question of personal or GP desire and belief. It's become a requirement, which in a way, it's a way to start.

EMS:
Ariel, we've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

AF:
So, M&A is such a broad term or deal making, it's such a broad term that I could talk about anything. But we do, in terms of valuations, that touch two of our activities, which are M&A and portfolio evolution, we've come across PE buyers that are coming in with very aggressive offers, in a way as a signal that they're either seeking opportunistic deals or saving the dry powder, waiting for some adjustment to happen.

And on the M&A side, we simply don't see that imbalance between supply and demand. Not yet, and probably not soon. So, I don't think this will be one of those self-fulfilling prophecy moments where the market expects valuations to fall and they do. Demand for quality assets is strong and some PE funds are missing out on the good deals with this approach. Of course, this is generalization, it doesn't apply to everything, it doesn't apply to everyone. It's always case by case. But my message to PEs and really to strategic buyers, as well, is strong deals are worth strong valuations.

EMS:
Ariel, I wanted to thank you so much for sharing your perspective with our listeners.

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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